Bitcoin Network Capacity Analysis – Part 2: Macro Transaction Trends

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Posted onJun 04, 2015

This is a continuation of TradeBlock’s block chain and network analysis to address the ongoing block size discussions. It is intended for an audience with at least a fundamental comprehension of block chain technology. If you have not yet done so, we recommend beginning with Part 1: Macro Block Trends.

Part 2 – Macro Transaction Trends

One of the most common metrics used to assess bitcoin, and payment networks more generally, is transactions per second and/or per day. When compared side-by-side, bitcoin’s capacity falls well short of the existing transaction volume of other major payment networks – a leading cause of the push to increase the block size limit.

Network Capacity

Transaction capacity in bitcoin is not a formally-set number, but rather determined primarily by the data limitations of the network. Accordingly, the maximum block data size divided by the average data size of each transaction offers the maximum sustained rate of transactions the network can support. Conventional wisdom indicates the bitcoin network can handle a sustained rate of seven transactions per second (TPS). While this may have been true at some point, those days are long since passed.

As shown in the chart above, the average bitcoin transaction data size has grown to roughly 600 bytes. This is largely a result of increasingly complex transactions, often using multiple inputs and outputs. Consequently, that means the bitcoin network can actually handle a sustained rate of roughly 2.8 TPS or roughly 240K per day – far less than commonly assumed.

Since 2013, the number of bitcoin transactions has climbed from 40K/day (0.5 TPS) to 110K (1.3 TPS), or about 275% growth. Should that trend continue, the bitcoin network will likely realize it’s maximum sustained TPS by December 2016, as shown in the pro forma CAGR analysis below.

Implications for Transaction Fees

A critical aspect of frequently hitting up against the hard block limit of 1 MB is the way it changes the economic model to send and process transactions. Assuming the limitations of the network don’t hinder demand growth, capped supply should drive up transaction fees to miners.

The reality of this may already be realized to a large extent, as indicated in the chart below. When blocks reach the 732KB default maximum block size (see Part 1 of this series for details), the average fee per byte of data accepted into the block chain climbs 13% above average, indicating miners are likely prioritizing more valuable transactions. Fee per transaction has been relatively stable since 2014 (at ~0.0002XBT). That said, average fee per byte of data has actually been trending steadily downwards since early 2014, despite growing competition for space in a block. More on miner incentives later in this series.

This analysis has been prepared in good faith on the basis of information available at the date of publication without any independent verification. Schvey, Inc. does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this presentation nor its usefulness in achieving any purpose. Readers are responsible for assessing the relevance and accuracy of the content of this publication. Schvey, Inc. will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication. This analysis may not be duplicated, shared, or reproduced in its entirety or in part for any reason without the expressed written consent of Schvey, Inc.